Our Portfolio Building Opportunity Report Reveals Companies That Can Bounce Back From This Market Turmoil

With a little bit of hard work, I’m discovering some outstanding candidates for the new “bounceback” report I’m working on. In fact, the shortlist I had is fast becoming a long list. That’s a sign of just how indiscriminate the recent panic-selling has been… and how many great companies there are selling for a song.

By the time I’ve got my report ready, I aim to have reduced the list down to my “top three bounceback belters” – and that’s when I’ll pass on details. I’m trying to get this done inside the next 10 days – so keep some investment cash back ready. We could be looking at the best portfolio-building opportunity I’ve seen in years.

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In the meantime, I’m coming across plenty of interesting stories. Take a look at this one for instance. It’s not a share I’m buying at the moment, but it’s worth a look all the same…

I doubt there are many companies valued at less that £2m with as many as twenty-seven thousand shareholders. But this is the extraordinary situation of National Milk Records (NMR).

With 7.34m issued shares traded on PLUS markets at a price today of 25p, NMR is valued at £1.83m. More than half of its shareholders own less than two hundred shares, worth under £50. Over twenty-four thousand have less than five hundred shares. That’s ridiculous!

Don’t get me wrong. As you know, I champion private individuals holding shares. It’s a good thing for them – and it’s good for the companies concerned. But looking after so many small shareholders is an administrative burden for the company. The shareholders themselves gain little benefit during their lifetime (the shares do not pay a dividend). And when they die their shares will most probably be put up for sale, acting as a drag upon the price.

A steady business… and a proud history

This is a pity. As I discovered when I visited its headquarters in Chippenham last week, NMR is an interesting company. It has a proud history, a very steady business and a good chance to build upon excellent relationships with the dairy industry.

Before 1943, milk recording in England and Wales was carried out by a loose confederation of milk recording societies. But in a bid to increase the efficiency of the dairy industry in war time, the task of milk recording came under the auspices of the Milk Marketing Board and NMR was formed. Recording the quality of milk on the farm was always voluntary. However, by 1953 NMR was taking records from 25% of all dairy cows, noting milk yields, taking samples, recording animal health, live births and sundry other information.

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Mrs Thatcher, who also antagonised dairy farmers by doing away with free school milk for the under sevens, disbanded the Milk Marketing Board. However, the task of recording milk continued and in 1997 National Milk Records was incorporated with each dairy farmer allotted a number of shares in proportion to the production of their herd. So NMR began with twenty-eight thousand shareholders and in spite of various share dealing initiatives the number is barely lower today.

The transition from pure service to a commercial, profit-making business

These shareholders are often NMR’s own customers and a consequence of this unusual arrangement has been an aversion to profit and a belief that the company should be run as a service rather than a business. Matters came to a head in 2001 when, after an unsuccessful attempt to merge with rival Cattle Information Service, a non profit-making organization owned by Holstein, a new management team was brought in with a brief to run NMR as a commercial operation and grow the business.

Today NMR has three divisions. These are National Milk Records, National Milk Laboratories and National Livestock Records. Using both its own staff and self-employed agents it provides a service both to farms and to dairies, recording milk quality and details of the herd. About 7,000 of the UK’s 15-18,000 dairy farmers are direct customers, as are most of the major dairies. Samples are assessed at NMR’s laboratories at Hillington, Wolverhampton and Harrogate and these ensure the quality of the milk that we buy and the price that the dairies pay for it, while farmers gain information necessary for better management of the herd.

A growing trend could play into NMR’s hands

Around half of dairy farmers still do not use an independent milk recording service, but trends in the industry are working in NMR’s favour. Although the number of dairy farmers has been shrinking, the size of herds has been increasing, and modern dairy farms have an expensive milking parlour and a well paid herdsman whose job is to micromanage the business. Management information, which is essentially what NMR offers, is essential to this process and is increasingly demanded by vets who, rather than visit farm animals James Herriott-style, would prefer to prescribe treatment on the basis of on-line records.

The supermarkets are also taking a greater interest in ‘provenance’ – in other words where the food that they sell has come from. Some have made milk recording a requirement in dedicated supply contracts, and have even been willing to pay for it - although this is perhaps as much to do with securing supply at a time when a shortage of milk has threatened, as it is about quality.

NMR also offers software for farmers. Its two main programs are Impel Pro, for basic record keeping, and Interherd, an animal health recording and management system. So it is has a leadership position in its markets, offers an essential and recession-proof service and has strong relationships with its customers. With 258 employees, an annual turnover of about £12m, and in the first half of this year to September, a pre-tax profit of £353,000 this is quite a sizeable business.

At first glance, the sub-£2m valuation seems very low. But dig a little deeper and you start to understand why. Another legacy of the past is NMR’s pension fund. The report and accounts for March 2008 showed that the present value of the pension fund liabilities was £24.2m, compared to a £22.8m value of the assets.

The scheme is now closed to new members but it will remain a burden, especially in the current financial climate. However, the challenge of making up this pension fund deficit gives NMR an extra incentive to grow its profits. Apart from capitalizing on a revival of the dairy industry, it is hoping to introduce its service into the large Irish market where independent milk recording does not exist. It’s also intending to offer new services including electronic tagging for sheep.

National Milk Records has some ambitious plans for the next few years. I’m not recommending this as a share to buy right now, but if I had £50 of its shares I would be very happy to hold on to them.

Back soon – I’m off to carry on my “bounceback” report…

Tom Bulford
for The Penny Sleuth

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P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.

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